Program Procurement Guidance
MCC Procurement Guidance Note: Price-Reasonableness Analysis
April 12, 2021
This document provides guidance to the MCA Entity on conducting price-reasonableness analysis (PRA) in accordance with the applicable provisions of the MCC PPG.
MCC Program Procurement Principles
According to the MCC PPG, only a commercially reasonable price shall be paid to procure goods, works, consulting and non-consulting services. To ensure compliance with this principle, MCC requires that all MCA Entities conduct a PRA of the prices offered in a procurement process, including shopping and Direct Contracting/Sole Source procurements. PRA shall also be conducted as part of the contract amendment process, whenever the amendment results in an increase of the contract price.
The PRA is conducted to ensure that the quoted prices of the bidder proposed for contract award are neither unreasonably high (which could happen for example in instances of poor competition or collusion) nor unreasonably low (which would cast doubts on the bidder’s understanding of the scope of the procurement and its ability to perform the contract successfully). This analysis provides a secondary check by the MCA Entity that the MCC funds will be used in a cost-effective manner, and that the contracted party will be able to meet the requirements of the procurement as set out in the solicitation documents.
The PRA is a review of the prices proposed by a bidder or a consultant (when the PRA is conducted as part of the procurement process) or a contracted party (when the PRA refers to an existing contract being amended) to ensure that the offered prices are fair to both parties (neither too high nor too low) considering without limitation factors such as the complexity of the task and the comparability of the prices on similar projects in local and international markets.
Mitigating the risk of unreasonably priced bids
There are several steps that MCA Entities can take upfront to pro-actively mitigate the risk of receiving unreasonably priced bids. Some of the routine risk mitigation measures include the following.
- Identify and assess the pool of potential bidders as well as any industry- or market-specific constraints that may apply (e.g., a limited number of qualified bidders; large number of failed similar projects; higher prices in the local market when compared with other markets due to special country conditions like access, security issues etc.). For large and critical procurements, this can be accomplished by conducting comprehensive market analysis and outreach events. The use of Requests for Information (RFI) is also encouraged as it may be an effective tool to gauge the market.
- Review competing projects in the local market that may limit the pool of qualified contractors.
- Prepare clear, value-driven, and biddable solicitation documents, i.e., specifications or Terms of Reference that bidders can fully understand and use to prepare adequately responsive technical proposals and reasonably calibrated financial proposals.
- Include in the solicitation document clear qualification and evaluation criteria that would encourage qualified bidders to participate in the solicitation.
- Remain engaged with the market to encourage as wide a participation as possible. This is an on-going process that starts with market outreach as mentioned above and continues with advertising the procurement opportunity via sufficient means and platforms to maximize the chances of a healthy competition; allowing sufficient time for the preparation of bids; facilitating bidders’ access to relevant information that would help them better understand the scope of procurement and therefore prepare fully informed bids (pre-bid conferences, site visits); responding promptly, clearly and fully to all clarification requests that are submitted within the timeframe indicated in the solicitation documents; allowing for adequate extensions of time for submission in the case of newly surfaced information or changes in the solicitation documents;
- Ensure that budget estimates are realistic and correspond to the requirements of the solicitation documents, and not just to the budget estimates in the procurement plan. To the extent possible estimated budgets should be based on independent, reliable sources and market data and should adequately reflect the particulars of the country situation, industry, and project.
These safeguards are obviously not failproof and MCA Entities are sometimes faced with unreasonably priced bids. Whenever this happens, the MCA Entity should analyze each case by its own merits, as there is no one-size-fits-all approach that would work for every conceivable situation. The process and methods described below are provided below by MCC to assist the MCA Entities in conducting the PRA.
Methodology for conducting the PRA
MCC provides several alternative methods for conducting the PRA and requires that MCA Entities apply at least two of the following methods when assessing the price reasonableness of a bid 1 ; exceptions are permitted when the contracts are awarded through direct contract or sole source methodologies, and when proposed contract amendments/option periods are based on rates and prices in the original financial proposal. The choice of a PRA method from the list below would depend upon the procurement type, method, complexity, and particular circumstances, for example, the number of bids received.
- Historical Prices: If the prices offered are comparable to the prices offered by a bidder and accepted in the past for similar contracts either by the same MCA Entity, by other large government buyers or by other donor agencies in the MCA country, then the prices may be assumed to be reasonable. If no similar contracts were awarded in the MCA country, then prices of similar assignments in other MCA countries may be used for comparison purposes, with due consideration of those price factors that may render such comparison irrelevant (different country conditions, access to resources, distance etc.).MCA Entity should also consider, to the extent possible, whether those historical prices were offered and accepted in a competitive environment and/or if a PRA was conducted by the previous buyer(s); otherwise, the MCA Entity runs the risk of using as its benchmark for comparison a historical price that was itself unreasonable. Further, when comparing current prices with historical prices, inflation and a reasonable margin for increased profits may be considered.
- Catalogue Prices: This method is suitable when purchasing off-the-shelf commercial goods or standardized non-consulting services where the supplier is likely to have a catalogue (in physical or virtual form), and the supplier is willing to provide a current, dated page or time stamped webpage from the catalogue that lists the price of the item being procured and any discounts that may be available to large buyers. In this case, the supplier may be requested to provide a reference of another large buyer, whether inside the country of the project or outside, who can verify the prices that were paid by that buyer to this supplier.
- Published Prices: Some commercially traded commodities have international or national prices that are published in popular press or online commodities exchanges. If the prices offered are similar and not considerably disparate from the published prices, then it can be assumed the prices are reasonable.
- Comparison with Prices of Similar Items: In the procurement of goods, consulting or non-consulting services, if a bidder can demonstrate the price of a similar item (or service) available on the market and justify its price difference based on additional or different features, the MCA Entity can accept the proposed price as reasonable. The differences between the supplier’s price and the price of a competitor should be detailed and justified, and the referenced prices should be available from verifiable independent sources (not only from the supplier itself). This method may also be suitable in the procurement of small civil works.
- Industry Data: Specific industry studies, reports, surveys, and statistics can be used in determining the reasonableness of prices for certain types of consulting and non-consulting services, if such data is publicly available from trusted sources such as professional or trade associations, consulting firms, government agencies, market research companies, rating agencies, Government-issued price lists, arbitration centers etc.
- Competitive Prices: In an open competitive bidding process where price is an evaluation factor (such as CB, QCBS, QPBS) and several acceptable and qualified bids are received, it can be safely assumed that the prices are reasonable as determined by the market conditions, but only if the discrepancy between the bid prices is not statistically relevant as explained below.
One of the most widely used statistical analysis tool for determining if a particular price deviates from other bidders is to calculate the standard deviation of the respective series of bid prices. To be relevant, this should be used when there are at least five (5) qualified bidders.
For example, let’s consider a procurement with six bidders who offered the following prices:
- Bidder A: $18 M
- Bidder B: $19 M
- Bidder C: $17 M
- Bidder D: $16 M
- Bidder E: $15 M
- Bidder F: $14 M
Bidder F is proposed for award but there are concerns regarding the reasonability of its bid price (too low).
This is how statistical methods can be used for PRA purposes:
- Calculate the mean (average) of the bid prices. In our case this is $16.5 M.
- Then calculate the standard deviation from this value (using the STDEV function in MS Excel). In our case this is $1.87 M.
- A rule of thumb says that all values that fall below one standard deviation from the mean (i.e., $16.5 M – $1.87 M = $14.63M) can be considered as unreasonably low. Consequently, the bid price of $14 M should be further investigated to determine its reasonableness.
- Similarly, all values above one standard deviation from the mean (i.e., $16.5 M + $1.87 M = $18.37 M) can be considered unreasonably high. If for example Bidder B had been considered for award, then its price of $19 M should be further investigated.
Please note however that mathematical or statistical calculations alone should not be used as the sole basis for the rejection of a bid, but rather as a starting point for further investigating the price reasonableness. Otherwise, we may fall in the trap of a false sense of objectivity that numbers and formulas usually convey.
If there are significant discrepancies between the prices of bids, proposals, offers or quotations, the MCA Entity should investigate potential causes of such discrepancies (e.g., ensure that the description of the procurement was not vague that could have been misinterpreted by some bidders, and that there were no calculation errors etc.). When most bids are grouped within a close price range (e.g., within one standard deviation from the mean) and there are a few outliers (either significantly higher or lower price than one standard deviation), then the offered prices within the close price range may be assumed to be reasonable and the outliers may be assumed to be unreasonable.
- The MCA Entity’s Budget Estimate. MCC requires that MCA Entities develop a realistic budget estimate that corresponds with the requirements of the solicitation document; if the budget approved by the Board in the procurement plan for this procurement is significantly different (exceeds by more than 25%) from the budget developed based on the solicitation requirements, then a new Board approval would be necessary per MCC guidelines. MCC encourages MCA Entities to disclose their budget estimate based on the solicitation requirements in the solicitation for consulting services (not necessarily for goods or works). The budget estimate, whether disclosed or not in the solicitation document, can be used for PRA purposes, but always in conjunction with any of the above methods (this shall never be the sole PRA method). To the extent possible, TEP or BRP members may be asked to undertake due diligence to determine if this estimate is a reliable basis for comparing bid prices.
There could be instances when even a solicitation-based budget estimate is not reliable, and in such cases MCC permits not disclosing this budget. These budget estimates may not be reliable for a variety of reasons including the following.
- The estimate was made without due consideration of project complexity or market characteristics.
- The estimate was prepared based on old information or old technology, while the conditions have evolved in the meantime.
- The estimate is biased toward a particular methodology, technology, process, or workflow that may be different from what the bidders proposed (or are likely to propose) in their bids;
- The MCA Entity’s budget includes a large value of contingencies while the bidders’ proposals do not include contingencies.
Since different PRA methods may be suitable for different types of procurements, MCC offers the following table to summarize which of the methods may be relevant:
|Goods||Civil Works||Non-Consulting Services||Consulting Services (under QCBS, LCS, FBS)||Consulting Services (under QBS, CQS, ICS)|
Other PRA methods may be used in addition to the ones listed above, if in the judgement of the MCA Entity such methods are applicable and relevant to the type or method of procurement, country and market context, level of competition etc., but only in conjunction with any of the above methods.
PRA for Individual Consultants
For the hiring of individual consultants under the Individual Consultants’ Selection (ICS) method, only the price of the successful consultant is evaluated. The viable PRA methods therefore center on comparing the remuneration rates proposed by the successful individual consultant (in order of importance):
- the salary or remuneration history of the successful individual consultant him/herself;
- the budget/PP estimate; and
- similar assignments in the past (Historical Prices), including some factor for inflation.
At the end of the exercise, the remuneration rates submitted by the individual consultant should be considered reasonable across at least two of the above three methods. It is important to understand that the PRA for individual consultants leans towards the assessment of abnormally high rates. In tandem with that, the rule of thumb to be considered by the MCA Entity is this: if the successful consultant’s daily remuneration rate is more than 10% higher than any two of the three pillars above, a more rigorous PRA is required before an award can be recommended.
For the hiring of individual consultants to serve as members in Bid Review Panels or Technical Evaluation Panels, in addition to the pillars above, the MCA Entity may use the Competitive Prices method to compare the remuneration rates of subject matter experts by sector. For example, the MCA Entity may compare all remuneration rates submitted by individual consultants who are financial management experts separately from remuneration rates for procurement experts or M&E experts.
If a range or band was published in the solicitation document as an estimate, such range/band is assessed as part of the budget/PP estimate pillar. If the successful individual consultant’s rates fall within the range/band, the PRA should additionally assess the salary or remuneration history of the successful consultant to analyze which part of the range/band is a more reasonable fit.
For the hiring of individual consultants under a fixed budget framework, the amount published in the solicitation document shall be considered a maximum, and any individual consultant with a financial proposal higher than this published amount, shall have his/her financial proposal automatically considered unreasonable and rejected. For individual consultants whose financial proposals are equal to or less than the fixed budget published, analysis under the 3 pillars above apply.
The PRA for individual consultants should include geographical experience considerations. The PRA should consider if the price disparity is attributable (either partly or entirely) to the fact that a consultant is local, regional, or international.
It is a principle of individual consulting procurement that the PRA be applied only to remuneration rates (or fees). Allowances, incidental expenses, travel costs, miscellaneous items and other such costs should not be considered part of the PRA, but these should undergo separate due diligence along with the travel allowance policy of the MCA Entity.
PRA for Contract Amendments and Options
To the extent possible, contract amendments and options shall use existing rates and prices from the original contract (including daywork rates in civil works contracts). If this is not possible due to the different nature of the additional scope, then PRA should consider the following, if and as applicable:
- comparison with rates and prices of similar items in the original contract;
- comparison with rates and prices of similar items in other similar contracts;
- any other PRA method presented above.
Clarifications and analysis
Regardless of the methods used for identifying unreasonably low or high prices, the MCA Entity should request clarifications from the bidder before rejecting its bid on the grounds of unreasonable PRA. The MCA Entity should request the bidder to provide clarifications to understand if there are justified reasons for the price being too high or too low. Such request for clarifications may include the following:
- detailed price (or cost) breakdown of the entire bid price or of certain sections or items, particularly those items that are quoted on a lump-sum basis;
- justification for anomalies such as price discrepancies within the bid, or the delivery schedule, staffing schedule or work method;
- confirmation that the bidder fully understands the requirements of the project, including environmental, social, health and safety obligations, as well as the requirements for the compliance with all applicable laws, regulations and standards;
- confirmation from suppliers, service providers or subcontractors that is low (if it is a low PRA) that unusually low prices are not related to certain favorable business terms that the bidder enjoys with its suppliers or subcontractors.
In certain situations, requests for clarifications may go as far as requesting detailed breakdown of the bid price based on a typical structure like cost (labor, materials, equipment) + overheads + contingencies + profit.
However, MCA Entities should focus their PRA analysis and only request clarifications for those price items that look unreasonable, and more detailed breakdown should not be requested.
The bidders should be given a reasonable time to prepare and submit such clarifications. Depending on the type and complexity of the project and the number of clarifications required, this time should be between 5-10 working days.
The bidders’ response should provide satisfactory evidence, explanations or justification and should include additional materials if requested (documentary evidence of previous contracts delivered under similar price terms, quotations from suppliers or subcontractors, hire purchase agreements, employment contracts etc.)
If the bidder fails to respond, or if the justifications are not satisfactory to the MCA Entity, then its bid may be rejected (and its bid security if submitted should be returned upon completion of the procurement process) after one round of clarification; MCC does not require protracted exchanges with the bidders on PRA-related issues. Further, these clarifications will not be used to change the bid price or to substantially change any material element of the bids, unless the MCA Entity has received MCC’s approval for such negotiations.
Following analysis of the clarifications submitted by the bidder, the MCA Entity will determine, with due consideration of all available information, if the price is reasonable or not. A negative PRA determination constitutes grounds for rejection of bid, subject to MCC’s No Objection if so required. In such case, the second lowest responsive bidder or the next ranked bidder will be subject to PRA.
Responsibility and Documentation
The PRA should be conducted (a) during the financial evaluation of the bid, proposal, offer or quotation of the potential winner of the contract; and (b) during the preparation of any contract amendment that would result in an increase of the Contract Price.
The responsible party for conducting the PRA is the PA, who can be assisted by the MCA Entity, the Fiscal Agent, the consulting firm that prepared the technical specifications/bills of quantities, or by any other party with relevant expertise in this area and with no conflict of interest.
The PRA should be documented in the record of the procurement (including the Evaluation Report if applicable) or in the document/memorandum justifying the contract amendment, as applicable.
Increase of Performance Security following an unreasonable PRA
MCC SBDs for the procurement of goods, works and non-consulting services contain specific language allowing MCA Entities to request the increase of Performance Security to be submitted by awarded bidders in certain situations when the PRA analysis indicates an implementation risk in the offered prices. These provisions are described in the following sequence:
- PRA shall consider not only the total Bid Price (as being unreasonably low or high), but it should also look at the internal consistency of the Bid Price to determine if the Bid is front loaded or unbalanced in any significant way.A Bid can be unbalanced in several ways, including without limitation:
Front loading – when a bidder submits significantly higher prices for items to be paid during the early stages of contract implementation (e.g., for obtaining permits and approvals, for mobilization, site clearance, etc.), compared to the other bidders. For example, if the cashflow projection for the rest of the bidders shows around 10%-15% of the Bid Price to be paid during the first weeks of the project, while the Bidder proposed for award would require 30% of the Bid Price, this would constitute front loading.
Windfall – when a bidder is better informed than the MCA Entity and the rest of the bidders (or makes a better educated guess) about the final volume of work/quantities to be executed and paid under the project. To benefit from windfall, the bidder submits unusually high prices for items that are traditionally subject to upward re-measurement or variation orders; and submits unusually low prices for items that may be substantially reduced or even cancelled during contract implementation. For example, a bidder for a roads contract may significantly inflate the unit prices for earthworks if they anticipate a lot of changes in quantities due to poor design or changing site conditions. Again, the comparison shall be done with the unit prices for the same items as quotes by other bidders.
- If there is any indication of an unreasonably priced or unbalanced bid, the MCA Entity should require the Bidder to submit evidence and calculations (detailed price analyses, work methods, etc.) for any items that fall under such a suspicion. The explanations should be able to support the internal consistency of the quoted prices with the Bidder’s implementation methods and proposed work schedule.Not all price discrepancies are unreasonable. Sometimes price discrepancies between bidders may be well justified. For example, a bidder may be in a better competitive position by being the manufacturer of critical equipment and materials, or by possessing a superior technology or a patented method that brings significant efficiencies. A bidder may have very low mobilization costs if they are already mobilized in the same area on another project etc.
- After reviewing the information provided by the Bidder, the MCA Entity may accept the Bid and proceed with the contract award if the justifications are solid.
- If the information provided by the Bidder leads to a negative determination (i.e., the Bid is materially unbalanced), the MCA Entity should reject the Bid and the Bidder should not be allowed to revise their Bid after such negative determination. The MCA Entity should move to the next ranked bidder and repeat the PRA process described here.
- If, in the MCA Entity’s judgment, such rejection would not be in the best interest of the MCC program, the MCA Entity should request the advice of the MCC Procurement Director before proceeding. In some exceptional circumstances, an alternative to rejecting the bid (if such rejection would result in a failed procurement) may be to increase the amount of the Performance Security as provided in the solicitation document. However, while it may diminish risk to the MCA Entity, simply increasing the performance security does not balance an unbalanced price, and this could be prejudicial to other bidders with higher (but still reasonable) prices that are not unbalanced. Therefore, consultation with the MCC Procurement Director is required if considering this alternative. However, the MCA Entity has another option in the case of a low or unbalanced Bid. This option should be applied in situations when rejecting the Bid would be detrimental to the efficiency or best value principles of MCC procurement e.g., if the Bid is technically solid and the next ranked bid is substantially more expensive (or has received a significantly lower combined score); or when there are no other technically qualified bidders etc. MCA Entity has the option to accept the Bid on condition that the Performance Security to be submitted by the awarded Bidder is increased up to a level at the discretion of the MCA Entity (subject to the limitation provided in the corresponding BDS sub-clause).Generally, MCC recommends that performance securities be increased up to a maximum level of 20% of the Contract Price. At the same time, the increased amount shall be reasonable and correlated with the amount of the contract e.g., 20% of a $100 million contract would be unreasonable, so the MCA Entity may choose a lower percentage (say 10% if the original Performance Security requested in the bidding documents was 5%). The 20% level may be applied in the case of lower value contracts (say under $5 million).
- If MCC and the MCA Entity agree to this alternative, the requirement for an increased Performance Security (and its amount) shall be clearly stipulated in the NOITA and the Letter of Acceptance to the awarded Bidder (and in the minutes of contract negotiations or contract finalization, if applicable). The Bidder shall bear all additional costs associated with obtaining the increased Performance Security. Refusal to provide the increased Performance Security shall result in rejection of the Bid (but the bid security will be returned upon completion of the procurement process).